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N.J. law could help Borgata double its tax rebate: attorneys

Borgata Kurdzuk file.JPG

The Borgata Hotel Casino & Spa last week won a tax appeal worth about $48.8 million, tax attorneys say. But under a New Jersey law known as the Freeze Act, the casino could more than double that refund by applying the revised assessment to the following two years of assessed value.
(Tony Kurdzuk/The Star-Ledger)

The Borgata Hotel Casino & Spa could end up doubling the nearly $50 million tax refund it won from Atlantic City, thanks to a state law meant to protect taxpayers that successfully appeal their assessments.

Under the law known as the Freeze Act, the Borgata eventually will be able to ask the state’s tax court to lock in for two more years the lower assessment it recently was granted, tax attorneys tell The Star-Ledger.

In a closely watched opinion issued last week, Judge Patrick DeAlmeida sided with the Borgata on a tax appeal it filed and agreed to slash 61 percent off its assessment for the 2009 and 2010 tax years. The steep fall in gaming revenue after the financial crisis and rising competition in Pennsylvania didn’t warrant the $2.26 billion assessment that Atlantic City had applied to the Borgata, the judge wrote.

DeAlmeida did not say how much this lower value was worth in terms of tax dollars, but outside attorneys and Atlantic City officials say it effectively means Borgata is owed a $48.8 million refund.

Atlantic City is no stranger to casino tax appeals, but the current decision is seen as setting a significant precedent. “If the decision stands, its impact could effectively exempt several other casino properties from local property taxation,” the city’s solicitor Braun Littlefield wrote in a statement last week, in which he said the city would appeal the ruling.

“We maintain that this is an inequitable and grossly unfair position in which to place the taxpayers of this city.”

Attorneys, however, say the city will have a hard time winning an appeal, and that once the court has rendered a final judgment in the matter, the Borgata can then ask it to apply the revised 2010 assessment of $870 million to the 2011 and 2012 tax years.

According to calculations by tax attorney A. Paul Genato of Archer & Greiner, doing so would raise the casino’s tax refund to nearly $106 million over the four years.

Atlantic City’s director of finance and revenue, Michael Stinson, said, “If the Borgata files unilaterally for a freezing, obviously we don’t feel that’s working in the best interest of the residents of Atlantic City.”

The Borgata declined to comment on whether it will seek to invoke the Freeze Act because it is set to go on trial in January over appeals it has brought for the 2011-2013 tax years.

“Since this relates to our pending tax appeals before the Tax Court, we will not comment upon this at this time,” Auggie Cipollini, senior vice president of operations, at Borgata said in an e-mailed statement.

The doubled refund aside, attorneys note the Borgata is also due 5 percent annual interest on its refund, starting from the first day it allegedly overpaid its taxes. Seth Davenport, an attorney with Davenport & Spiotti in Montville, estimates this amounts to about $6,850 every day the refund is overdue, and that by now millions of dollars in owed interest has accrued.

Atlantic City has broader reasons to be concerned by the tax court’s ruling, attorneys and analysts say.

While the city historically has dealt with tax appeals from casinos, by and large these get settled out of court. The Borgata dispute, on the other hand, was the rare appeal that went to trial, and out of it has come a judge’s opinion that could be a catalyst for a new, vigorous round of tax appeals.

“It could be a precedent-setting decision,” Vito Galluccio, an analyst with Moody’s Investors Service who covers the city’s credit rating, said in an interview. “It could create almost a new wave of appeals.”

Casinos that have watched gambling revenues dry up over the years may have less of an incentive to settle with the city. “I imagine everyone’s positions are going to harden,” said Michael Caccavelli, a tax attorney with Zipp & Tannenbaum in Jamesburg.

The Borgata and its competitors would not say what the impact of DeAlmeida’s decision will be. But officials at the Atlantic Club and Golden Nugget said in statements they intend to file appeals the next time they are eligible.

“All we ask is that we be treated fairly. At our current valuation, we do not believe that this is the case and we will be seeking a fair property valuation,” said Tom Pohlman, executive vice president and general manager of the Golden Nugget Atlantic City.

Representatives of Revel, Tropicana, the Trump casinos and the Resorts Casino declined to comment. A spokesman for Caesars Entertainment Group, which controls casinos under the Caesars, Harrah’s, Bally’s and Showboat brands, didn’t return a call.

Moody’s has warned about the long-term impact of casino tax appeals on the city’s finances, which are largely dependent upon taxes on gaming and related revenue. Over the past five years, Atlantic City’s assessed property value has fallen by more than a third, largely as a result of the casino appeals, Galluccio wrote in a report issued Friday.

The smaller tax base has meant more pain for the taxpayers, who have seen rates and amounts due rise.

But not only do successful appeals cause the city’s tax base to shrink, they also are forcing it to ramp up its debt.

Since 2007, Atlantic City has issued about $180 million in bonds to refund casinos overpaid taxes, including nearly $100 million last year, according to Moody’s and bond documents.

Next month, the city expects to issue as much as $50 million more in bonds for casino refunds, according to Stinson. Meanwhile, Moody’s expects the city will issue another $50 million in debt next year to refund the Borgata.

Debt service payments now amount to about 15 percent of the city’s budget, or about twice the U.S. average of municipalities, said Julie Beglin, vice president at Moody’s. The agency also estimates the city’s debt burden will rise to above 2 percent of the value of its tax base, up from 0.5 percent a few years ago.

The state, which placed Atlantic City under its supervision because of the tax appeal issues, is closely following the appeal of the Borgata decision, a spokeswoman for the state Department of Community Affairs said. Moody’s and Standard & Poor’s, which also rates the city’s debt, also are monitoring its fiscal condition. In the past, both have cut its credit rating in the face of tax appeal challenges.

Moody’s, which lowered Atlantic City’s credit rating in 2010 to Baa1 with a negative outlook partly because of the volume of casino tax appeals it was facing, has given the city credit for steps it has taken to manage these fiscal challenges, such as by raising taxes. But Galluccio said there is a question of how much more Atlantic City can keep upping rates on its large poor and blue-collar population.

Atlantic City has said it’s authorized an appeal of DeAlmeida’s decision. But tax attorneys say this may be an insurmountable challenge.

“The appellate division gives great deference to the trial court, especially the tax court, because the tax court is a court of special expertise,” said Davenport, the attorney with Davenport & Spiotti.

That’s particularly the case if the appeal comes down to a question over which expert witness a judge found to be more credible. “Those are usually difficult hurdles on appeal,” said Caccavelli of Zipp & Tannenbaum.

He said if Atlantic City continues to pay out tax refunds to casinos, it will be forced to keep raising tax rates, at which point the relief that appeals provide casinos gets eaten up.